US dollar weakness forecast to drive gold, oil prices

Continued US dollar weakness will see emerging market central banks raise their gold allocation and push the price above US$1,500 an ounce next year, with an associated rise in oil prices, according to BoA-Merrill Lynch.

Continued US dollar weakness will see emerging market central banks increase allocations to gold next year and push the price above US$1,500 an ounce, with an associated rise in oil prices, says the BoA-Merrill Lynch global research team.

Francisco Blanch, the bank’s head of global commodities research, believes West Texas Intermediate (WTI) crude could break US$100 per barrel by late 2010 or early 2011. At the time of writing, WTI crude futures were trading at around US$76.52 per barrel.

“Loose monetary policy and a weaker US dollar should put upward pressure on crude oil prices next year,” he said.

“In addition to the monetary factors, a stronger than expected cyclical rebound in the global economy should lead to tighter physical oil supply and demand fundamentals next year, and we forecast WTI to average US$85 per barrel.”

He added that US dollar weakness would give way to gold appreciating against all currencies, prompting emerging market central banks to stockpile the commodity. Gold futures were trading at around US$1,176 at the time of writing.

Separately, Steven Pearson, head of G10 currency strategy at BoA-ML, says he and his team have become contrarian bulls on the Japanese yen.

In a report, he notes that the US dollar is likely to become less negatively correlated with risk appetite as reserve manager flows weaken. The yen is expected to strengthen broadly even as global equities gain, with cross rates set to become more volatile.

“We have changed our view and become contrarian JPY bulls,” wrote Pearson. “The change is motivated by our expectation that the US Federal reserve will remain on hold through 2010 as well as a flow of funds based assessment that demand for JPY from longer-term investors and trade flows is likely to strengthen in the quarters ahead.”

The bank is recommending shorting US dollars to Japanese yen.

28 Nov 2009

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